David Nelson's Insight: Europe Is Achilles’ Heel of Surging US Stocks

David Nelson is chief strategist of Belpointe Asset Management and a Moneynews contributor.

Catching many individual and professional investors off guard, the S&P 500 ended the first quarter of 2013 at all-time highs, overcoming the fiscal cliff, the sequester and repeated calls that the market was ahead of itself.

What makes the performance even more surprising is that our markets are soaring to new highs at a time when earnings growth is tepid and, despite recent labor-market gains, far too many people in this country don't have a job — or have given up trying to find one.

It is difficult to talk about the “wealth effect” when so many Americans are working two jobs to earn even less than they did a decade ago.

Nevertheless, as Jason Trennert of Strategas Research Partners pointed out in a recent interview, it is the “TINA” factor that is driving U.S. stocks higher. TINA is, of course, the acronym for There Is No Alternative.

With interest rates near record lows and inflation still subdued, stocks continue to offer an upside. Valuations are reasonable, dividends are far more attractive than interest-bearing investments and corporate balance sheets are very healthy. It is important to note that data points driving corporate earnings higher aren't necessarily positives for the labor market.

U.S. corporations have learned to produce more with less and even today are reluctant to return to pre-crisis employment levels.

Perhaps stocks at all-time highs are predicting a repair of some of the issues raised above, or a return to growth above the low single digits most economists expect.

The truth is that we really can’t be sure. Those who say with certainty what the economy and market are going to do next should seek jobs as fortune tellers rather than analysts.

We analyze the numbers and focus on the secular themes driving the economy while eliminating problems and mistakes as quickly as we can. It is the best we can do as portfolio managers and strategists.

There are no absolutes when you are talking about the complexities of world economies and the dynamics of the securities markets.

You are better served by focusing on what factors could unravel some of the positives. In my opinion — and it is important to state that it is opinion — Europe continues to be the Achilles’ heel of the bull market. I find the events coming out of Cyprus and the European Union in the last few weeks to be of particular concern.

Many of the stock market corrections we have faced in the last few years originated from Europe.

Let's not forget, last year markets rallied when ECB Chief Mario Draghi made his famous "Whatever it takes" speech. However, Michael Gayed, chief strategist at Pension Partners, pointed out recently that the rhetoric in Europe has gone from "Whatever it takes” to “Whatever can be taken!"

I’ve said this often in the last few years but it deserves repeating: “You can’t have a common currency without a common government.”

Europe continues to live under the delusion that they can hold their currency and union together with nothing more than the Maastricht Treaty.

It is important to note that following the actions in Cyprus, for the first time a euro in one country is worth less than it is in another.

The fact that many of those hit by the very large levy or tax on Cypriot deposits may in fact have been members of the Russian mob doesn't matter. The issue is that, for the first time, the European Union has gone after depositors to help pay for the mistakes of local government.

This has enormous implications for the rest of the eurozone. If you are a depositor in a European bank located in a weak country like Italy, Spain or Slovenia, you have to be concerned.

Those with deposits exceeding 100,000 euros ($130,000) have to be thinking about protecting their assets. While runs on European banks aren't with us yet, the probability has dramatically increased.

Remember, banking is about confidence — and that seems in short supply.

The current crisis in Europe has its roots in Germany. Angela Merkel is up for re-election and has been issuing statements to help placate hardliners who are tired of paying more in taxes to finance the life style of EU members to the South. In addition, the head of the Euro Group, Dutch Finance Minister Jeroen Dijsselbloem, sent markets tumbling when he said Cyprus should be a “template” for bailouts in the eurozone.

Until Europe understands that nothing short of creating a United States of Europe, with member nations willing to give up sovereignty and form both an economic and political union, confidence in their currency and in turn their banks will always be suspect.

These concerns are showing themselves in currency markets with a weakening euro vs. the U.S. dollar. It now hovers near four-month lows. This could put pressure on U.S. multinationals with currency translations hurting profits.

The developments in the eurozone and decisions coming out of the European Central Bank in the next few months need to be monitored closely. Any correction here will probably start and end with Europe.